PDX Broker’s Commercial Insights: Article No. 8

In the same spirit as my previous article on Retail property, the third quarter reports came pouring in for office properties as well. In the Portland Office Market, the third quarter ended in lieu with retail with higher vacancy and a very slight decrease in rental rates. As far as new construction, seven new buildings became available.

The average vacancy rates increased to 11.0% at the end of this quarter. This rate reflects a 0.5% increase from the second quarter of 2009. Class C office reported a rate of 8.4%, Class B office; 13.4% and Class A office; 10.5% vacancy. Class C notably had the highest increase in vacancy growth. I attribute this towards many of the “mom and pop” office users to be closing down and moving back towards a home office type setting. It is usually these types of users that migrate more towards the Class C office type spaces, same as with Class C type retailers and strip centers.

Vacancy rates no matter what sort of property type will always be a little different depending on where in the Portland market you hail from. The following is a list of different districts, including SW Washington, and their associated office vacancy rates:

CBD….Vacancy =10.0%….Average Quoted Rate=$22.03

Clark County….Vacancy=14.8%….Average Quoted Rate=$19.23

I-5 Corridor….Vacancy=16.9%….Average Quoted Rate=$23.52

Lloyd District….Vacancy=5.8%….Average Quoted Rate=$17.72

Northeast….Vacancy=5.9%….Average Quoted Rate=$15.50

Northwest….Vacancy=5.4%….Average Quoted Rate=$18.86

Polk County….Vacancy=6.2%….Average Quoted Rate=$15.75

Southeast….Vacancy=7.1%….Average Quoted Rate=$17.34

Southwest….Vacancy=14.6%….Average Quoted Rate=$19.05

Westside….Vacancy=12.6%….Average Quoted Rate=$17.45

(Stats Provided By Costar Property—Spendy program, but so far worth it!)

Rental rates, as you can see in the above list, are lowest in Northwest, Portland this quarter and highest in the Portland’s I-5 Corridor. The average quoted rental rate in the Portland Metropolitan market for all classes was $19.90 per square foot/per year, a decrease of 1.2% from the second quarter of this year. The average quoted rate within Class C office was $15.50 per SF, Class B; $18.81 per SF, and Class A at $24.76 per SF. The suburban areas came in at $19.29 per SF in the third quarter, while the downtown CBD (Central Business District) ended at an average of $22.03 per SF. These statistics were all based on full service equivalent rates.

Net Absorption (the net change in occupied spaced over a given period of time, which also includes direct and subleased space) in the Portland Market was negative as expected with 273,317 square feet ending the third quarter. Compared to the second quarter and first quarter of this year, which both had negative net absorption as well, the last time we saw positive absorption was in the fourth quarter of 2008.

Overall, office vacancy did climb a little, and vacancy rates decreased as many thought it would. Net absorption was negative and seven buildings came to market. I don’t think we have seen office rates hit their lowest yet as I do with retail. Instead, I see the suburban areas getting even worse in vacancy with Class C office users either trying to take advantage of falling rates by upgrading to Class B space, moving in to denser populated areas to improve business, or simply by moving home to cut costs associated with leasing an office. Stay tuned folks we still got a while to ride this one out.

This article is part of the ‘PDX Broker’s Commercial Insights’ series for The Portlander. The column is written by PDX_Broker, a Portlander who works as a Commercial Real Estate Broker in Downtown, Portland. PDX_Broker specializes in Retail Properties and does both Landlord and Tenant representation throughout the Portland Metro and SW Washington areas. She writes frequently about the Commercial Real Estate Industry, Commercial Businesses, and Retail Owners in the Portland area.